Downdraft
March 31, 2010
For the year 2000 we have seen hundreds of mutual funds lose 40%, 50% and more of their value. This does not seem right since the fund is supposed to be managed by a professional. How can this “professional” do such a bad job? More than half of the funds this year will not out perform the S&P500 index which closed down about 10%.
What is going on?
When you put your money in a mutual fund you are supposed to be hiring someone who knows how to make money. He should be able to do a better job than you. But he has not. If this person worked for me I would fire him. You don’t hire people to lose money for you.
Now that you have fired this bum let’s examine why he did such a poor job (pun intended). Each mutual fund has one or more analysts who are supposed to be able to determine if the stock of a company is a good buy. That means will it go up?
Homeowners Insurance: Lessons from Katrina and other gulf storms.
March 30, 2010
Homeowners Insurance: Lessons from Katrina and other gulf storms.
by: Matt McWilliams
Homeowners Insurance is supposed to protect us in case of disasters. That is what we have come to expect from our homeowners insurance over the years. But what if the disaster is the costliest in U.S. History? What if your insurance agent’s home and office were destroyed in the disaster also?
That is what happened to many customers and homeowners insurance agents and companies after Katrina hit the Gulf coast. Many agents’ homes, offices and insurance Companies’ claims centers were in the same situation as their clients due to the storms. So what did they do? They set up “office” in tents and mobile trailers. Then Hurricane Rita blew away these temporary offices and the agents and companies set them up again. These temporary shelters acted as a communications center for all people in the surrounding areas. Local people would come by to ask questions, meet with their claims adjustors and just catch up on the news with their neighbors. Extreme circumstances dictated unconventional responses: some agents even filed claims for their clients without even talking to the clients just so they could get the claim “in the queue.” Allstate allowed customers to submit claims through any agent in the country and set up a priority line to assist. They sent email to agents in the areas surrounding the disaster areas to act as messengers by “word of mouth” to their fellow agents in the effected areas. The larger companies such as State Farm & Allstate that service claims for the national flood Insurance Program even used satellite imagery to determine damage in some neighborhoods that were entirely flooded.
Money Management, Part 2
March 30, 2010
FEARING LOSSES
There is a huge difference between being risk averse and fearing losses. You must hate to lose. In fact, you can program your brain to find ways to not lose. But not losing is a logical thought-out process, rather than an emotion-based reaction.
Two human-based tendencies come into play. The first is the sunk-cost fallacy and the second is the exaggerated-loss syndrome.
Sunk-cost fallacy: You are in a trade that begins to go against you. You reason that you have already spent a commission, so you have costs to make up for. Moreover, you have spent time and effort researching and planning this trade. You reckon that time and effort as cost. You have waited for just such an opportunity and you are afraid that now that it has come you will have to miss this trade. The time spent waiting for opportunity is something you also count as cost. You don’t want to waste all these costs, so you decide to give the trade a little more room. By the time you realize what you’ve done, the pain is almost overwhelming. Finally, you have to take your loss which is now much larger than it might have been. The size of the loss adds to your fear of ever losing again. The end result is brain lock and inability to pull the trigger on a trade.
Ask The SEC
March 29, 2010
Who is the SEC and why should I ask them anything? The Securities and Exchange Commission in Washington, DC is the government bureau that regulates the securities industry. They make the regulations that all stock exchange listed companies, brokerage houses and mutual funds must follow.
My readers know that I am a believer in the purchase of mutual funds for investment and retirement accounts. The reason is that very few people are qualified to choose stocks. Unfortunately that also applies to many mutual fund managers especially when you look at the performance of the majority of funds for the year 2000.
I can excuse the average Joe for not being able to pick winners, but I cannot excuse a fund manager who is paid huge amounts of money (always 6 figures and mostly 7 figures) to lose the cash of the little people who invest. There are 77,000,000 owners of mutual funds and 80% of them have less than $50,000 in their accounts. Why is anyone giving them their money to have them lose it? These are the “experts”.
Why Residual Income
March 28, 2010
Why Residual Income
by: Daegan Smith
Why it’s better to have residual income and not solely depend on paycheck income? Residual income by definition is income earned by an individual that are generally coming from his assets at hand. It allows a person not to worry anymore spending 8 hours a day in the office working as his personal assets are now earning money for him.
The current practice for people in earning a living is by getting a job and work either on an hour or annual basis. They have salaries or paychecks that they receive usually on a monthly basis and this allows them to buy the things they want, travel to places they want to travel or simply buy anything that their paychecks allows them to buy but the happy story ends where the money has been spent already and people have to continuously report back for work and continue on with their current jobs again and again. Their paychecks do arrive again and again but so does the effort for them to continue working for that hard-earned money.
Why Are Duopolies So Competitive?
March 27, 2010
Why Are Duopolies So Competitive?
by: Geoff Gannon
A duopoly is a situation in which two firms control nearly all of the market for a product or service.
Duopolies can be surprisingly competitive. If you remember that the price of a product or service is determined solely by the highest losing bid price and the lowest losing ask price, you’ll realize why a duopoly can be so competitive. A large number of inefficient competitors will have almost no affect on prices in the long run unless someone (either a government or a group of idiotic investors) is willing to continually finance unprofitable operations in an unprofitable industry (think airlines).
Of course, there is always the fear of a price fixing scheme in a duopoly. Generally, however, that fear is unfounded. Human nature suggests a price fixing scheme is far more likely to occur in an oligopoly than a duopoly. Humans weight the fear of loss far more heavily than the greed of gain when making calculations about the future. In a duopoly, mistrust increases the fear of loss inherent to any price fixing scheme (namely, the other guy will stab you in the back). In an oligopoly, the diffusion of power and the lack of excess capacity at any one firm makes price fixing very attractive. Price fixing in an oligopoly is a much safer bet than price fixing in a duopoly.
An Analysis of Overstock.com (OSTK)
March 26, 2010
An Analysis of Overstock.com (OSTK)
by: Geoff Gannon
Why is a value investor writing about an unprofitable internet company? Because value investing is about finding dollars that trade for fifty cents; with a market cap of less than 75% of sales, Overstock.com (OSTK) looks like it may be exactly that.
But isn’t it too risky?
The greatest risk in any investment is the risk of overpaying. So, the real question is: what is Overstock worth? I think it’s worth at least $1.5 billion. With Overstock’s market cap currently sitting around $500 million, my valuation certainly looks far fetched. But, there’s only one way to know for sure. Let’s take apart my argument piece by piece, and see if any of my assumptions are unreasonable.
First Assumption: Over the next five years, Overstock will neither generate truly free cash flow nor consume cash. In other words, its free cash flow margin will average 0%. Cash generation in some years will exactly offset cash consumption in other years. Obviously, this assumption is unreasonable, because there is almost no chance the cash flows will exactly offset.
Simple Ways to Help Avoid Identity Theft
March 25, 2010
Simple Ways to Help Avoid Identity Theft
by: John Mussi
Each year, thousands of people around the world fall victim to identity theft the assumption of their identity by others in an attempt to empty their bank accounts, establish fake lines of credit in their name, or to take advantage of current lines of credit and max out any credit cards that they might currently have.
Luckily, there are some simple steps that you can take that will help you to avoid identity thieves and keep your personal and financial information private.
The tips provided below are designed to help you to protect your identifying information, though in the end the implementation of them is up to you.
Lock Up Your Records
One easy way to keep your financial information out of the wrong hands is to purchase a lock box in which to keep your personal and financial records until they are out of date. Though the lock box doesn’t have to be expensive, it’s important to buy a sturdy one with a good lock on it in the event of a break-in or if someone should be in your house looking for financial information. Buying a fireproof lock box can also have the benefit of protecting your financial and personal information in the event if a fire or other natural disaster.
Protecting Your Financial Information
March 25, 2010
Protecting Your Financial Information
by: John Mussi
In this day and age, a major concern of most people is avoiding identity theft the stealing of your personal and financial information by someone who wants to use it to either steal the money that you have in bank accounts, max out your credit cards, or establish new lines of credit in your name and then use them with no intention of repaying the balances. This can cause major problems, because in addition to stealing your money the thieves can ruin your credit rating and that can cost you loans, credit lines, and even some jobs.
There are steps that you can take to help avoid identity theft and the theft of your financial information, however; for the most part it’s simply a matter of being careful with your information and using a little bit of common sense.
Watch Your Mail
One of the easiest ways for thieves to get their hands on your financial information is to go through the things that you get in the mail and throw away. Bank statements, duplicate receipts from online purchases, and stock reports can all come in the mail and may contain information that you don’t want thieves to get their hands on.
E-Cheques and Online Commerce
March 24, 2010
E-Cheques and Online Commerce
by: John Mussi
Many people are unsure about doing business online, due to the various news reports that they have seen about hackers and identity theft. In most cases, however, there is nothing to fear from buying and selling products online because of the cutting-edge security features that most online retailers and auction websites employ to keep your financial information safe and secure.
Should you still find yourself a bit hesitant to use the internet for your shopping needs, this article is designed to let you know about some of the features of e-commerce and how it can help you in your daily life.
Online Security
Given that the news media tends to focus only on the negative stories that it receives, it may seem like the internet is an insecure venue for purchases and payments. The truth, however, is that millions of transactions occur over the internet every day and that most instances of the theft of either identity or financial information happen offline or because of e-mail scams. Financial and personal information that is transmitted to an online store is encrypted using advanced security programming, only being decoded by the same program once it reaches the retailer that it was sent to. It would be practically impossible for any information that is sent via an encrypted communication to be either intercepted or decoded by any third party.
